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“The Economic Way of Thinking” 11 th Edition

Explore the concepts of employment and unemployment, including definitions, data collection, labor market decisions, and the factors that contribute to unemployment persistence. Also, learn about the Phillips Curve and its implications for inflation and unemployment.

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“The Economic Way of Thinking” 11 th Edition

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  1. “The Economic Way of Thinking”11th Edition Chapter 15: Employment and Unemployment

  2. Chapter 15 Outline • Introduction • Unemployment and Non-employment • Employed, Not Employed and Unemployed • Labor-Market Decisions • Unemployment Rates and Employment Rates • Costs and Decisions

  3. Chapter 15 Outline • Unemployment and Recessions • Why Does Unemployment Persist? • The Phillips Curve • Reducing Unemployment by Illusion: Inflation and the Misdirection of Labor • Labor Market Policies

  4. Introduction What do we mean byunemployment?

  5. Unemployment and Non-Employment • Observations • Approximately half of the people in the US are not employed. • A quarter are under the age of 16. • One-eighth are over 65. • Questions • How do we distinguish between the unemployed and the not employed? • When does unemployment become a problem?

  6. Employed, Not Employed and Unemployed • Unemployment data • Bureau of Labor Statistics (BLS) • Current Population Survey • Census Bureau • Monthly survey – 60,000 households

  7. Employed, Not Employed and Unemployed • Who is counted? • Non-institutional people over age 16 • Classifications • Employed • Unemployed • Not in the labor force

  8. Employed, Not Employed and Unemployed • Unemployed • In the non-institutional population. • Over age 16. • Without employment during survey week. • Made efforts to find employment during the last 4 weeks. • Be available for work.

  9. Employed, Not Employed and Unemployed Unemployment Rate = Unemployed / Labor Force

  10. Employed, Not Employed and Unemployed • Deriving Unemployment Data • Total population • Minus under age 16 or institutionalized • Equals non-institutional population • Minus those not in labor force • Minus those employed • Equals those unemployed

  11. Seeks employment (in the labor force) Does not seek employment (not in the labor force) Accepts employment (employed) Does not accept employment (unemployed) Labor Market Decisions Non-institutional Population

  12. Labor Market Decisions • BLS definition of unemployed implies: • A decision to actively seek employment. • A decision not to accept any of the employment opportunities available.

  13. Unemployment Rates and Employment Rates • Unemployment Rate = • # unemployed / labor force • Employment Rate = • # employed / non-institutional population

  14. Unemployment Ratesand Employment Rates • Questions • Why hasn’t the large increase in labor force participation caused the unemployment rate to rise? • Does technology reduce the number of jobs?

  15. Costs and Decisions • Teenagers living at home with free room and board. • In school – limited availability to job market. • If deciding on college – will not make a job commitment. • Can afford long job search. • Can afford to quit a job to find a better one.

  16. Costs and Decisions • A person loses his / her job • Incentive to find another job. • Decreases as unemployment benefits increase. • Likely to remain unemployed. • Member of multi-earner family. • Eligible for unemployment benefits.

  17. Costs and Decisions • With high expectations of finding a job… • More people will enter the labor force. • People will search in occupations where employment expectations are greater.

  18. Costs and Decisions • All 3 scenarios will lead to an increase in unemployment rates. • Teenagers living at home. • Worker who loses his / her job. • People with high expectations. • Would this increase indicate a weaker economy?

  19. 1953 5.5% 1957 4.3% 1960 5.5% 1973 4.9% 1979 5.8% 1990 5.5% 1998 4.4% Unemployment and Recessions Recessions Unemployment Recovery Unemployment Rate Peak Rate 1954 5.5% 1958 6.8% 1961 6.7% 1975 8.5% 1982 9.7% 1992 7.4%

  20. Why Does Unemployment Persist? • After a recession has ended… • Firms will wait to expand until recovery is certain. • Firms become more efficient during recession.

  21. Why Does Unemployment Persist? • Employers have an incentive to keep wages high. • Keep workers from leaving. • Easier to reduce employment than wages. • Unemployed do not put downward pressure on wages. • Employers more attentive to those on the payroll.

  22. S surplus W1 Why won’t the wage rate fall to We? We D Q1 Qe Q2 Why Does Unemployment Persist? Wage rate Number of employed

  23. Why Does Unemployment Persist? • Conclusions: • A persistent surplus of labor will exist. • Quantity supplied of labor will be greater than the quantity demanded. • There is a chronic shortage of jobs and a chronic surplus of job seekers.

  24. The Phillips Curve • Economist A. W. Phillips (1958) • Unemployment increased when • Money wage rates were increasing slowly. • Unemployment decreased when • Money wage rates were increasing rapidly.

  25. The Phillips Curve • Policy makers proposed • Unemployment might be reduced • With an inflationary increase in money supply. • Unemployment and Inflation • Inversely related

  26. The Phillips Curve • If full employment causes inflation • Will inflation bring about full employment?

  27. 69 68 56 66 67 55 59 65 58 62 57 54 64 63 61 60 Reducing Employment by Illusion Inflation rate A “well-behaved” Phillips curve: U.S., 1954 - 69. 6 5 4 3 2 1 0 4 5 6 Unemployment rate

  28. 74 80 78 81 75 79 73 77 70 76 71 72 Reducing Employment by Illusion Inflation rate 11 A “not-so- well-behaved” Phillips curve: U.S., 1970 - 81. 10 9 8 7 6 5 4 3 2 1 0 4 5 6 7 8 9 Unemployment rate

  29. Reducing Employment by Illusion • What caused the Phillips Curve to dissolve? • Distinguish between real and nominal wages. • Is the unemployment rate close to the natural rate?

  30. Labor Market Policies • What can the government do to lower unemployment? • Reduce economic fluctuations. • Job skills training. • Abolish unemployment compensation. • Improve quality of information on the economy.

  31. Labor Market Policies • Western European Policies • Designed to reduce unemployment • Discourage employers from hiring new workers • Nearly impossible to lay-off workers • Increased unemployment

  32. Once Over Lightly • Many people not employed are not in the labor force – and not unemployed. • Difference between not employed and unemployed is not always clear. • Expected advantages of alternative opportunities determine decisions as to labor force entry.

  33. Once Over Lightly • Expected benefits and costs as to labor force entry have been changing in recent years. • Labor markets and commodity markets differ. • Unemployment rate and inflation rate. • Government labor market policies and effect on unemployment.

  34. End of Chapter 15 QUESTIONS?

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